China has once again raised its defence spending by a double digit percentage. There’s nothing new about that; the average rate of growth since 2002 has been 14.6% according to official figures. Usually, the annual announcement of yet another hike is met with mild interest here in Australia. This year was a little different.

ASPI’s executive director (my boss) Peter Jennings reckons that this ‘presents a challenge for Australia around making sure that we’ve got our defence policy settings right, and that we’ve got the right amount of defence expenditure, and we’re not being complacent’. Neil James, Executive Director of the Australian Defence Association, said we need to ‘upgrade navy and air force capabilities—whose contribution would be most important in any regional conflict’, though not at the expense of the army.

When Neil James (lead proponent of the professional military judgement school of strategy) and Peter Jennings (card carrying member of the academic-bureaucrat policy cabal) agree, perhaps it’s time to take notice. So let’s think it through; does this year’s (entirely expected) increase in Chinese defence spending demand that we up the ante on our own?

Of course, context is important. Back in the early 2000s, China was increasing its defence budget by double figures and nobody batted an eyelid. Not only were we distracted by Iraq, but the dulcet tones of China’s diplomacy had us content with the Middle Kingdom’s ‘peaceful rise’. Fast forward to 2014, and we’ve had half a decade of assertiveness bordering on recalcitrance from China. From the South China Sea to the East China Sea, China’s been flexing its muscles and making its neighbours nervous.

It seems a no brainer; if a rising power starts building up its military and causing ructions, we’d better not sit on our hands—especially when it’s a one-party state with a lousy human rights record, a well-oiled propaganda apparatus and a manic fixation on historical grievances. After all, we had a rough time with such entities last century. Best to be wary.

Instinctive as it might be to spend money on defence in the face of China’s military build-up, it’s worth pausing for a moment to ask why? What will be achieved?

The first step is to be clear about the problem. That’s usefully done by elimination. Nobody has even hinted that China has either the capability or intent to attack Australia, so we can discount the usual focus on Australia’s continental defence. Of course there’s the argument beloved of admirals and shipbuilders that we need to protect our sea lines of communication. But I’m doubtful of that canard at the best of times, and in the case of China it stretches credibility; what’s China going to do, block our exports to them? Finally there’s the vague but comfortably diplomatic suggestion that China’s rise doesn’t constitute a threat per se but that it might destabilise the region, leading to a threat to Australia from an unspecified third party. Sorry, but that sort of ethereal reasoning doesn’t pass muster with me when there are billions of dollars at stake.

With the usual suspects discounted, what’s left? Well, a boost in Chinese spending could rationally elicit an increase in our spending if we thought it necessary to buy into the increasingly fraught arena of Asian strategic affairs. The argument for doing so is straightforward; unless the United States and its friends and allies stand firm in the face Chinese provocation, the norms upon which our security and prosperity are built will slowly be eroded by creeping Chinese hegemony.

While it’s clear that Australia has a strong interest in maintaining norms (which is double speak for limiting China’s strategic influence), it’s not clear how a boost to our defence spending—to say 2% of GDP as is proposed—would make a material difference to the balance of power in today’s Asia. In short, we face the free rider’s dilemma: we can increase our costs by spending more but it won’t deliver us any more security than we would get by doing less. There’s nothing new about this; we’ve been free-riding on US efforts for the past 60 years, it’s just that the nature of the risks have changed.

Nonetheless, an argument for Australia spending more on defence can perhaps still be made even if doing so makes no material difference to the raw balance of power. In a paper I presented in Tokyo at the National Institute of Defence studies last week, I discuss the impact of China’s economic rise and its even more rapid escalation in defence spending. To cut a long story short, I reach the conclusion that the critical factor in the years ahead won’t be the extent to which the United States and its allies can maintain and convey resolve in the face of Chinese attempts to gain the upper hand.

It seems to me that US-allied ability to prevail hasn’t changed in most circumstances—the combined forces of Japan and the United States will remain formidable for a long time yet. Rather, the situation is that China will be able to impose increasingly high costs on the United States as time goes on, even if they can’t win outright. It’s that ability to impose increasingly higher costs that raises the question of American credibility and resolve. If the point is reached where China concludes that the United States is unwilling to take risks in support of its Asian allies, or if those regional allies and partners allow themselves to be hived off and neutered due to high potential costs, the game will have changed fundamentally in China’s favour. There’s no doubt that the US understands this, and it’s the reason why it launched its ‘pivot’ or ‘rebalance’ to Asia; to both reassure friends and allies and send a message of continued resolve to China.

If the name of the game is resolve, what’s the implication for Australia? Simply this; even if we can’t materially tip the balance of power, we might nonetheless be able to make a difference by demonstrating resolve and thereby, in turn, encourage stronger resolve in others, including the United States. One way to do this would be to spend more on defence.

To be honest, I’m not sure that this amounts to a strong argument for diverting billions of taxpayer dollars away from health, education and social spending in favour of enhanced military capability. But it certainly amounts to an important caveat to my previous advocacy of relatively modest defence spending for Australia.

If it’s resolve that ultimately matters, there are many other ways to achieve that goal. Higher levels of defence spending are unlikely to be sufficient on their own, and they mightn’t even be necessary. The United States, for example, is working hard to show resolve through a variety of means while making substantial cuts to its defence budget.

One thing is clear; if resolve is the critical factor, then a clear and consistent approach is essential. On this count we must despair, in recent years our diplomatic approach to both China and the US alliance has been confused and opaque—as the chopping and changing in the last two defence white papers amply demonstrates. Let’s hope the forthcoming White Paper presents a clear and sustainable explanation of the role Australia plans to play in the years ahead.

Even on the issue of defence spending—which we thought was unambiguous under the new government—there are already signs of backsliding. The rock solid commitment to build twelve submarines has now ‘never been justified‘. More importantly, the promise of no more cuts to defence spending—which the Minister repeated as recently as last week—is hard to reconcile with what the government did to the defence budget back in December. At that time, a total of $1.1 billion was cut from 2015–16 and 2016–17, allowing $663 million to be brought forward across this year and the next, leaving a deficit of $426 million compared with prior aggregate funding. Then there was, yet another, ‘temporary increase in the rate’ of the euphemistically titled ‘efficiency dividend’ which returned another $202 million to the Treasury. So much for resolve.

Note: The government’s adjustments to the defence budget are detailed in table 7 on page 15 of the 2013–14 Defence PortfolioAdditional Estimates Statement (PDF). Although Defence was also provided with an additional $1.6 billion over four years for foreign exchange supplementation (to cover the rising cost of foreign purchases) the net result was a reduction in the buying power available to Defence.